Contract Review's Role in Risk Management

Nov 19, 2024

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Welcome to RIMScast. Your host is Justin Smulison, Business Content Manager at RIMS, the Risk and Insurance Management Society.

In this episode, Justin interviews Andrew Bent on risk management involvement in developing requirements for contracts, the most important thing a risk professional can do before they start drafting insurance requirements, and the types of coverages and limits to include in a contract. Andrew shares his approach to reviewing contracts received from other organizations, and his pet peeves about reviewing contracts that have requests for endorsements or policy coverages that are hard to obtain or no longer exist. He shares some general tips for negotiations.

Listen in for advice on win-win strategies in contract negotiations.

Key Takeaways:

[:01] About RIMS.

[:14] Member registration for RISKWORLD 2025 is now open! General registration opens on December 4th. Visit RIMS.org/RISKWORLD.

[:26] About this episode. From RIMS headquarters in New York, we will delve into the importance of contract review in risk management with our guest today, Andrew Bent.

[:47] The next RIMS-CRMP Exam Prep Virtual Workshop will be held on December 17th and 18th. The next RIMS-CRMP-FED Exam Course will be hosted along with George Mason University from December 3rd through the 5th.

[1:06] Links to these courses can be found on the Certification page of RIMS.org and through this episode's show notes.

[1:13] RIMS Virtual Workshops! "Risk Appetite Management" is back by popular demand. Registration closes November 19th for the session on November 20th and 21st. That session will be led by Ken Baker.

[1:28] Elise Farnham of Illumine Consulting recently joined us here on RIMScast. On December 4th and 5th, she will host "Applying and Integrating ERM". On December 17th and 18th, she will host "Captives as an Alternate Risk Financing Technique".

[1:45] Those are just three of the workshops RIMS offers; we have lots more! Other dates for the Fall and Winter are available on the Virtual Workshops calendar, RIMS.org/virtualworkshops.

[1:57] Interview! Our guest today has 20 years of experience as a risk management professional and consultant and is known for the development, implementation, and optimization of ERM frameworks. He is Andrew Bent, the Senior Engagement Lead from Marsh Advisory.

[2:17] Andrew is also one of the founding members of the RIMS CRMP Commission. He's here to talk about the importance of contract review in risk management and to provide tips and strategies for effective review.

[2:28] We will also discuss how contract review can even influence business relationships. Andrew Bent, welcome to RIMScast!

[2:57] Andrew started in New Zealand as a chemical engineer. He compares chemical processes with risk frameworks. He then worked in risk management with the New Zealand Customs Service.

[4:11] Australia and New Zealand's governments made drastic cuts to public service about how resources were deployed. They did this with good risk management theory, the 4360 standard.

[4:48] The Customs Service applied the 4360 standard to the risks of people, crafts, and goods coming across the border. They did risk assessments on many things. It was a good way for Andrew to understand how risk works and how to either mitigate risks or live with them.

[5:22] There are only so many shipping containers that can get opened every day and so many people who can be evaluated every day if you don't want to shut down your country's entire commerce trade and flow.

[5:41] Andrew stayed there for a few years. Then he moved to Canada in 2009, a financially difficult time. He loved Canada and found the people to be similar to New Zealanders. He worked in a large municipal police agency in Western Canada.

[6:55] They were forward-thinking and strategic in how they thought about risk. He was able to help set up an enterprise risk management team and help accelerate the integration of strategy and risk.

[7:17] For a time, Andrew was the only chemical engineer in the world who had moved to Alberta and didn't work for an oil and gas company. So he went to work for an oil and gas company for a while.

[7:27] Andrew found RISKWORLD hugely beneficial to his work. Andrew had a challenging job working beside health and safety folk. He developed a broad range of understanding of health and safety rules and regulations and helpful insights into operations and business.

[7:54] Andrew then moved back into the regulatory space with one of the provincial energy regulators. Then he met his now wife, an American. They had a long-distance commuting relationship until he moved down to the U.S. and subsequently to Washington, D.C.

[8:23] Along the way, Andrew had a couple of additional jobs, including cyberspace and risk management teams and risk management functions in the gig economy.

[8:51] Fundamentally, Andrew has found that risk management breaks down into understanding what you are trying to do, what your inputs are, what your risks are, and managing them as much or as little as your risk appetite needs.

[9:33] Andrew says contract review usually has the deepest understanding of what is and what is not insured under current programs of insurance. That helps them inform contract owners about what are and are not acceptable levels of risk they can assume in most contracts.

[9:54] Contract review helps to draw out the discussions around the organization's risk-reward balances that they want to make sure are built into contracts. They can get overlooked in the rush to get a deal done. Contract review wants to bring that balance back to the conversation.

[10:27] Contract review also provides advice on some of the types of risk controls outside of insurance risk transfer that a contract owner should be thinking about, such as cyber, IT controls, data protection, health and safety, and a host of other issues.

[10:49] Contract owners should be thinking about and potentially building into their contracts as part of the negotiation with the counterparty. This is a two-way negotiation. We always want to be thinking about what each party is trying to achieve out of this contract.

[11:16] As risk management professionals, part of our role is to be the grownup in the room while everyone else is rushing to get the deal done. We often have to take a step back and ask if this is the right deal to be done.

[11:32] If it is, what do we need to protect and what value do we bring to the organization if the deal is done?

[11:52] Andrew believes the most important thing a risk professional can do before drafting insurance requirements is to talk to the person who wants the contract. Andrew rarely sees it happen but it is the single most important thing to happen before writing any requirements.

[12:15] Everyone involved needs to understand the purpose of the contract. Why are we doing this? What is being proposed here? What's the work that needs to be done? What are the services that are going to be delivered?

[12:31] What are the organizational objectives to be achieved by entering this contract? Andrew shares an example from his career of how this is discussed, with a small vendor providing a critical service but who had trouble with the standard contract. Flexibility was needed.

[14:46] If you understand the work or services to be provided in a contract, you're two-thirds of the way to understanding what risks need to be covered by insurance or another way. If someone's digging a ditch at your building, they probably don't need to provide cyber coverage.

[15:40] In cases where you have people moving between sites, you might need to include auto coverage. Workers' compensation coverage is always something you need to think about. You don't want to end up being on the hook if a contractor is injured working for you.

[16:19] Some things may not just need to be in our insurance provisions within a contract but also into the liability or other sections of the contract. You need to see the entire contract, not just the insurance provisions within the contract.

[16:48] Plug Time! RIMS Webinars! On November 21st, HUB International returns with the fourth installment of their Ready for Tomorrow series, "From AI to the SEC: The Future of D&O Litigation and Regulatory Exposures".

[17:07] On November 25th, Resolver returns to discuss "The Future of Risk & Compliance: 5 Key Insights for the Modern Leader".

[17:15] On December 5th, we have "Predictive Strategies to Detect Electrical and Machinery Failures", presented by Global Risk Consultants, a TÜV SÜD company.

[17:27] On Thursday, December 12th, OneTrust returns to deliver "Staying Vigilant: 7 Practical Tips for Ongoing Third-Party Risk Monitoring".

[17:36] More webinars will be announced soon and added to the RIMS.org/webinars page. Go there to register. Registration is complimentary for RIMS members.

[17:48] RIMS is now accepting nominations for all awards other than Risk Manager of the Year 2025. The submission deadline is Monday, January 6th, 2025. To receive a RIMS award, all winners must be active members and in good standing.

[18:08] The awards are the Diversity, Equity, and Inclusion Chapter Leadership Award, the Harry and Dorothy Goodell Award, the Volunteer of the Year "Heart of RIMS" Award, the Richard W. Bland Memorial Award, the Chapter of the Year Award, the Rising Risk Professional Award, the Risk Management Hall of Fame, and the Cristy Award.

[18:46] You can find more information about the awards through the About Us page of RIMS.org or the link in this interview's show notes.

[18:55] Back to My Interview with Andrew Bent!

[19:10] When Andrew reviews a contract his organization has received from another organization, he keeps in mind that everyone tries to negotiate a contract in a way that is most beneficial for them.

[19:21] In an ideal world, everyone approaches contract negotiation as a win-win, but most of the time, people come in with their ideal position. Understand the other party. A large company will have multiple layers and a legal department to negotiate through and changes will take time.

[20:35] If you're dealing with a smaller organization, maybe a one-person shop, be aware that they may not have a lot of risk management knowledge. Don't take advantage of that. As a risk management professional, you have an ethical obligation to do the right thing.

[21:08] You need to make sure to protect your organization. You also want to make sure that the counterparty you're contracting with is also left in a position where if something does go wrong, they're not destroyed.

[21:26] Andrew doesn't want to be the proud owner of someone's home because that's the only asset they have. Be sensible about the obligations and insurance requirements you place on parties, particularly on those without a lot of assets. Be thoughtful in managing those things.

[21:58] You have to be able to think about what the other party is looking to protect and to achieve out of this contract. That doesn't mean you give up your objectives, limits, and red lines.

[22:17] Step out of your viewpoint briefly and put yourself in their shoes. It gives you a perspective on what might be a reasonable compromise between the two positions and helps you get to an agreed position faster and more efficiently.

[22:45] Andrew's Number One pet peeve is people who refuse to negotiate. Everyone starts with their ideal position but if you're not prepared to move, then you're not prepared to do business. Every contract needs to be a two-party agreement or you're not being commensurate.

[23:16] Another pet peeve is requesting things that aren't going to help you manage your risk. If Andrew is looking at a contract from a counterparty and they're asking for things that bear no resemblance to the scope of work, that tells him they're phoning it in with a standard contract.

[23:42] If Andrew gets both of those things together, he asks if this is the level of input in their contract, what will they be like to work with? You can learn a lot about the people you are potentially going to work with by how they negotiate and work through that process.

[24:07] If they're prepared to come to the table and have a reasonable discussion, not always an easy discussion, that says a lot about how they're going to work once they've got ink on paper and you're into the business you want to get into.

[24:34] Andrew has had requests for a form that doesn't exist anymore. This is driven by very old standard contract language that hasn't been updated since 1984. He uses it as an opportunity to educate. Some people refuse to be educated. The computer says they need that form.

[25:20] That shows what they would be like to work with. You need to understand what you are trying to achieve and how important this particular contract is. Sometimes you just have to walk away when the value of doing what the counterparty is asking for isn't worth it to you.

[26:05] Andrew gives examples of both a reasonable requirement and an unreasonable requirement from a landlord if you want to do construction within a newly leased building. It's about how, where, and what those requests are and how reasonable they are in the contract.

[27:12] Remember that you are working with another party toward a mutual benefit. A legally binding contract is between two parties that come to some agreement with a transfer of services and payment between them. There has to be something of value to both parties.

[27:39] You're there for a reason. Even if you can go in hot and heavy, unwilling to bend, that doesn't mean you should even if there is a power imbalance between the two parties.

[28:24] There is another party, another person or group, involved here. Treat them with the courtesy, respect, and professional dignity you would like to receive as well. Work with them. Try to understand their position.

[28:51] It's OK to walk away. There are some deals that you're just not going to get done. There are times when the best course of action is just to say, Look, we gave it the old college try, and for whatever reason the risk appetite and the risk tolerance for both parties didn't line up.

[29:28] If you do it respectfully and professionally, you maintain that relationship for the future, and maybe next time it will work out; it just didn't this time. Be professional, be thoughtful, be mindful of your position, and also be mindful of the other party.

[30:02] Special thanks again to Andrew Bent for joining us here on RIMScast! Andrew will be making an appearance in our brand-new video series for the RIMS-CRMP. We'll eventually update this episode's show notes with that link.

[30:16] More RIMS Plugs! The RIMS App is available to RIMS members exclusively. Go to the App Store and download the RIMS App with all sorts of RIMS resources and coverage. It's different from the RIMS Events App. Everyone loves the RIMS App!

[30:51] You can sponsor a RIMScast episode for this, our weekly show, or a dedicated episode. Links to sponsored episodes are in our show notes. RIMScast has a global audience of risk and insurance professionals, legal professionals, students, business leaders, C-Suite executives, and more. Let's collaborate and help you reach them! Contact pd@rims.org for more information.

[31:36] Become a RIMS member and get access to the tools, thought leadership, and network you need to succeed. Visit RIMS.org/membership or email membershipdept@RIMS.org for more information.

[31:53] Risk Knowledge is the RIMS searchable content library that provides relevant information for today's risk professionals. Materials include RIMS executive reports, survey findings, contributed articles, industry research, benchmarking data, and more.

[32:10] For the best reporting on the profession of risk management, read Risk Management Magazine at RMMagazine.com. It is written and published by the best minds in risk management.

[32:24] Justin Smulison is the Business Content Manager at RIMS. You can email Justin at Content@RIMS.org.

[32:31] Thank you all for your continued support and engagement on social media channels! We appreciate all your kind words. Listen every week! Stay safe!

Mentioned in this Episode:

RIMS DEI Council

RIMS-Certified Risk Management Professional (RIMS-CRMP)

RIMS Strategic & Enterprise Risk Center

NEW FOR MEMBERS! RIMS Mobile App

RIMS-CRMP Stories — Featuring Valerie Fox!

Nominations open for RIMS 2025 Awards! (Through Jan. 6, 2025)

Nominations for the Donald M. Stuart Award

RIMS Webinars:

"From AI to the SEC: The Future of D&O Litigation and Regulatory Exposures" | Sponsored by Hub International | Nov. 21, 2024

"The Future of Risk & Compliance: 5 Key Insights for the Modern Leader" | Sponsored by Resolver | Nov. 25, 2024

"Predictive Strategies to Detect Electrical and Machinery Failures" | Sponsored by TUV SUD GRC | Dec. 5, 2024